PROCREDIT HOLDING AG
Fitch Ratings has affirmed
At the same time, Fitch has affirmed the IDRs and VRs of five subsidiary banks of PCH operating in
Fitch has withdrawn all the Support Ratings as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on
Key Rating Drivers
PCH'S IDRS AND SSR
PCH's IDRs and SSR are driven by Fitch's view of high likelihood of external support being forthcoming to PCH from its core international financial institution (IFI) shareholders: KfW (
Fitch views the propensity of PCH's core shareholders to provide support as high because of the long-lasting and strategic nature of IFIs' investment in PCH, their role in PCH's governance structure, the alignment of the IFIs' missions of promoting economic and social development with
PCH's VR
Fitch assesses PCH on a consolidated basis. PCH's VR of 'bb' reflects the group's operations in less stable and less advanced economies, the successful financial record of its largest subsidiaries, typically nominal domestic franchises of the operating subsidiary banks and a business model focused on cautious SME lending and building strong customer relationships. PCH's VR is complemented by the group's strong corporate governance and prudent risk management.
Fitch's updated economic assumptions for countries where the group operates indicate sound economic rebound, despite some remaining risks related to the pandemic, supply-chain disruptions and rising energy prices. Consequently, we have revised the outlook for the group's operating environment to stable from negative.
Fitch expects the group's capitalisation to remain only adequate in the context of high appetite for organic growth but commensurate with the group's risk profile. At end-3Q21, the common equity Tier 1 (CET1) ratio of 13.8% (end-2020: 13.3%) and the total capital ratio of 15% were maintained with reasonable buffers over minimum regulatory requirements, including the SREP add-on (at 8.2% for CET1 and 12.6% for total capital ratio). The bank's management has signalled its intent to pay out
Our assessment of the group's funding and liquidity considers the nominal standalone deposit franchise of its subsidiary banks (apart from PCBK), some reliance on wholesale funding, and reasonable liquidity, which is managed centrally. The funding has been generally stable and largely deposit-based with satisfactory gross loans/customer deposits ratio of 110% at end-3Q21. Senior and subordinated debt issued by PCH, interbank funding, and loans from IFIs (mostly extended directly to PCH's subsidiaries and partly guaranteed by the holding) complement the funding structure.
Liquidity is well-managed across the group and adequate reserves are held at the group level to cover subsidiary banks' potential liquidity needs. The Basel III liquidity ratios (liquidity coverage and net stable funding ratios) were well above 100% at end-3Q21.
PCH's VR is based on Fitch's assessment of the consolidated group's financial profile, because we view its failure risk as substantially the same as that of the group. This reflects the following factors: the group being subject to consolidated supervision and required to meet regulatory requirements at the consolidated level; the fungibility of capital and liquidity across the group, subject to its operating companies fulfilling their regulatory requirements; integrated liquidity management, with contingency plans; expectations that double leverage at the holding company will stabilise sustainably below 120% (end-3Q21: 119% under IFRS); and a simple organisational structure with full ownership of banking subsidiaries.
We view the pandemic-driven restrictions on dividend payments by banks in some
SUBSIDIARY BANKS - IDRs AND SSRs
The IDRs and SSRs of PCH's subsidiary banks - PCBA, PCBBiH, PCBK, PCBNM and PCBS - reflect the likelihood of potential support from their sole shareholder. Fitch believes the five subsidiaries are strategically important to the group and remain an important part of the group's long-standing and well-established presence in southeast
However, the extent to which potential support for PCBA, PCBBiH and PCBK can be factored into the subsidiaries' ratings is constrained by Fitch's assessment of risks related to their respective jurisdictions, in particular, transfer and convertibility risks. Absent of country risk constraints, these subsidiaries' Long-Term IDRs would be notched down once from the parent's Long-Term IDR.
The Long-Term IDRs of PCBNM and PCBS (both notched down once from PCH's Long-Term IDR) are at the level of
The one-notch uplift of PCBBiH's Local-Currency IDR from its Foreign-Currency IDR reflects a lower probability of restrictions being placed on servicing of local-currency obligations in case of systemic stress.
PCBDE IDRs, SSR and DEPOSIT RATINGS
The equalisation of PCBDE's IDRs with those of PCH and the bank's SSR reflect Fitch's view of a high likelihood of parental support. This view is based primarily on the bank's central treasury role within the group and a strong legal commitment in the form of a profit and loss transfer agreement, which obliges PCH to replenish PCBDE's equity should the latter suffer a loss. The Stable Outlook on PCBDE's rating reflects that on the parent.
Fitch does not assign a VR to PCBDE because the bank does not have a meaningful standalone franchise and its operations rely strongly on integration within the broader group. PCBDE's role as a 'service' bank to other group members means that the bank concentrates on providing treasury, clearing and liquidity-management services. The bank also offers some co-financing with sister banks and financing to German SMEs, but the latter is narrow. PCBDE is the regulatory anchor for the group's consolidated supervision by BaFin and Bundesbank. Fitch believes the regulator would be supportive of any measures taken by PCH to protect German depositors and ensure the bank's viability.
A profit and loss transfer agreement between PCH and PCBDE includes a provision requiring a capital injection by the parent if PCBDE's regulatory total capital ratio falls below 13%. PCBDE's Deposit Ratings are aligned with the bank's IDRs. We have not given any Deposit Rating uplift because in our view the bank's qualifying debt buffers would not afford any obvious additional benefit over and above the support benefit already factored into the bank's IDRs, even if they reach a sufficient size.
SUBSIDIARY BANKS - VRs
The VRs of PCH's five SEE subsidiaries balance the risks stemming from their operations in emerging markets, narrow to moderate franchises, strong expertise in SME lending, and conservative risk appetite resulting in better-than-sector-average asset-quality ratios for most of the markets. These features, complemented by the group's distinctive corporate culture and well-grounded remote banking, have enabled the resilience in subsidiary banks' performance since the onset of the pandemic.
Fitch has removed PCBNM's VR from Under Criteria Observation (UCO) because the rating review resulted in the assigned VR being at the same level as the implied VR. Fitch has upgraded PCBNM's Capitalization & Leverage score to 'bb-'. The bank's CET1 ratio is just marginally below 'bb' threshold, and we adjust the Capitalisation & Leverage positively for capital flexibility and ordinary support, as we believe that the bank has strong access to capital from its parent, if needed.
We have revised the outlooks on the operating environment scores for all markets in this review (for
The subsidiary banks entered the pandemic with relatively low impaired loans (mostly below 3.5% of gross loans at end-1H21, except for PCBA) and sound coverage ratios compared with regional peers reflecting their prudent risk management. At end-1H21, the Stage 3 loans ratio at all banks were broadly stable from end-2019, except for PCBA that continued its de-risking strategy and improved its ratio to 4.7% from 6.1%.
The banks' operating profitability is generally modest by international standards (except for PCBK), but with a healthy rebound in 1H21. Net interest margins continued to contract on most markets owing to tough competition and low interest rates, with only PCBBiH's improving in the past six quarters. We expect loan impairment charges (LICs) to normalise in the next two years after high pandemic-related LICs frontloaded in 2020. PCBK has one of the strongest operating profit/risk-weighted assets ratio (3% in 1H21) out of the
All banks benefit from the access to ordinary support from the parent bank. PCBK's and PCBS's capitalisation (CET1 ratios of 18.1% and 15.5% at end-1H21, respectively) continue to be supported by decent profitability (PCBK) and solid asset quality (PCBS). The capital buffers at PCBNM (CET1 ratio at 11.3%) continue to tighten but are still adequate for its risk appetite. PCBA and PCBBiH rely on capital support from the shareholder to facilitate growth targets due to their weak operating profitability.
The funding mix at all five banks is dominated by customer deposits, which are supplemented by long-term loans from IFIs earmarked for SME development projects and by funding from the group. The loans/deposits ratios were almost stable at between 110% and 120% at PCBS, PCBNM and PCBA. The ratio at about 140% at PCBBiH, although decreasing, still reflects its weak deposit franchise, which requires more support from the parent than the other banks. PCBK mainly benefits from its strong market position and franchise, providing the bank with a pool of low-cost current accounts and a more disperse deposit base, resulting in a loans/deposits ratio at 78%. The banks' liquidity is underpinned by their liquid assets comprising cash, placements at central banks, local government bonds and, for some, other highly rated debt securities. All liquidity coverage and net stable funding ratios were above 100% at end-1H21.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
PCH
A weakening of support available to PCH due to, for example, an exit of one or more core shareholders, or a material decrease in their stake, or a change in their support stance, could lead to a downgrade of PCH's IDRs and SSR.
PCH's VR could be downgraded as a result of a deterioration in the environments where the group operates, especially if combined with a material weakening in asset quality. The group's VR could be also downgraded if its capitalisation deteriorates, particularly if the CET1 ratio erodes below 12%, without credible prospect of it being restored within a short period.
PCH's VR would also be downgraded if the holding company's common equity double leverage is above 120% for a sustained period.
SUBSIDIARY BANKS
The IDRs of the five subsidiary banks would be downgraded if Fitch perceives a decrease in their strategic importance for the group, which is primarily based on the group's commitment to the respective countries. We do not expect any such changes in the rating horizon.
Changes in Fitch's perception of country risks, in particular an increase in transfer and convertibility risks in
The VRs of subsidiary banks may be downgraded if there were a marked weakening in asset-quality metrics, associated with a deterioration in profitability at any of the banks.
As PCBDE's IDRs, SSR and Deposit Ratings are equalised with PCH's IDRs, a negative change in PCH's IDRs would lead to a corresponding change in PCBDE's ratings.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
PCH
The IDRs could be upgraded if PCH's strategic importance for its core IFI shareholders increases.
An upgrade of PCH's VR would require an improvement of the operating environments of the jurisdictions where the group operates, combined with maintaining good asset quality, a sustainable profitability and significant strengthening of capitalisation.
SUBSIDIARY BANKS
PCBA's, PCBBiH's and PCBK's Long-Term IDRs could be upgraded as a result of diminished country risks, which we view as unlikely in the medium term. PCBNM's and PCBS's Long-Term IDRs could be upgraded if the parent's rating is upgraded and the respective Country Ceilings are raised. Fitch considers an upgrade of these two banks as unlikely in the rating horizon given the Stable Outlook on PCH's Long-Term IDR and the Negative and Stable Outlooks on the respective sovereign ratings.
PCBK's VR is likely to be upgraded if its operating environment improves strongly. An upgrade of PCBNM's and PCBS's VRs would require a combination of an improvement in their operating environments and strengthening of their franchises and financial profiles. For PCBA and PCBBiH, this could be triggered by a broadening of their franchises and a significant improvement in core profitability metrics.
As PCBDE's IDRs, SSR and Deposit Ratings are equalised with PCH's IDRs, a positive change in PCH's IDRs would lead to a corresponding change in PCBDE's ratings.
VR ADJUSTMENTS
PCBBiH's VR of 'b-' is below the implied VR of 'b' due to the following adjustment reason: Business Profile (negative).
The Operating Environment score for PCH at 'bb' is below the 'aa' category implied score due to the following adjustment reason: International Operations (negative).
The Business Profile score for PCH at 'bb' is above the 'b' category implied score due to the following adjustment reasons: Management and Governance (positive), and Strategy and Execution (positive).
The Earnings & Profitability scores for PCBNM at 'b+' and PCBS at 'b+' are below the 'bb' category implied scores due to the following adjustment reason: Historical and Future Metrics (negative).
The Capitalization and Leverage score for PCBNM at 'bb-' is above the implied 'b' category due to the following adjustment reason: Capital Flexibility and Ordinary Support (positive).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Summary of Financial Adjustments
For periods to end-2019, Fitch has adjusted the impaired loan ratio as reported under local regulatory standards for PCBBiH to bring it in line with the reporting standards of the
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
PCH's IDRs and SSR reflect potential support from its core IFI shareholders, of which KfW is the only entity rated by Fitch. The IDRs and SSRs of the six subsidiary banks are driven by support from PCH.
ESG Considerations
We do not assign ESG factors scores to PCBDE.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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